From the excellent Yichuan (Lulu) Wang

by on August 27, 2012 at 2:17 am in Economics, Weblogs | Permalink

You all should be following him, or so it would seem to me.  Here are excerpts from his post What China Could Be Building:

The real risk is not that the housing won’t be used, but that the crash would have secondary effects. Local governments are dependent upon land sales for revenues, meaning a housing crash could have serious implications for government. In Guangdong province, some local governments are actually tearing down mountains to make new land in the ocean, all to sell the land. This, along with the recent reversal of capital flows and possible insolvency of private wealth management firms, represents a serious liquidity risk that can have disastrous consequences.

…So let’s answer Scott’s [Sumner] fundamental question:

So here’s my question for all of you China skeptics that insist they are building way too much housing, infrastructure, heavy industry, etc.  What precisely do you want them to build more of?  And what are the 100s of millions of Chinese living in tiny ramshackle homes to do?  Sit tight for a few more decades while resources pour into nice urban services for the pampered elite?I want them to start building leaf blowers, so we don’t have so many Chinese people in the low productivity position of sweeping streets. I want them to start building farm equipment, so we don’t have so many Chinese farmers tending the fields. I want them to build more laundry machines, to free the rural Chinese from scrubbing clothes on washboards. I want them to build electric stoves, so my Grandpa can put away the coal fired outside oven. I want them to build computers that can deliver cheaper education to the masses.

Instead of just focusing on “building,” I want them to invest in human capital, so productivity can be at a level that we don’t need “make work” jobs. I want them to build more schools and hire better teachers, so classes aren’t as large and you’re not damned if you can’t make it in a top elementary school. I want productivity to be high enough that high end stores don’t need more clerks than actual customers.

I want these things among many others that will only be more obvious in a freer market.

That Scott can get a haircut for $4 or an ice cream cone for 50 cents shows how low productivity and wages are in China. Yet they will not grow any faster with more housing or more state directed investments. Cheap subway rides are nice, but are they not just another sign that transportation infrastructure has been built too quickly? I’m not saying China is hitting a ceiling for growth, or that vast swaths of China are condemned to poverty. But what I am saying is that we need to worry about the systemic fragility that underpins the Chinese system, and be very, very concerned about the unknown magnitude of the downside risk.

His full blog is here, his short bio is here.

Eric August 27, 2012 at 2:39 am

Sun Yat-sen had this crazy idea of taxing land value and distributing the income as a citizen’s dividend. He picked up this poisonous idea while in the US from a crazy economist named Henry George.

Thank G-d China didn’t pick up on this or the parasites in the West would be in REAL trouble.

david August 27, 2012 at 6:17 am

One-way trip to provoking everyone who currently extracts the land rent into hating and ganging up on you. Which would have been a major drawback in Warlord Era China. You are, after all, effectively nationalizing some % of their land.

Only places like Hong Kong ever got away with the state owning all land and renting it out, because its government did not need the support of local people with economic surplus to transform into political power. And it wasn’t agricultural or plantation-based to begin with, which exacerbates the importance of such rent-created surpluses.

david August 27, 2012 at 6:37 am

Anyway, Georgist fantasies aside…

All of the devices Wang mentions, like leaf-blowers for streets, laundry-machines, electric stoves, and labour-saving farming equipment are things which are consistent with a population that stays in urbanized cities. You want labour-saving, productivity-increasing devices? Step one is letting people into homes hooked up to modern infrastructure, or at least what modern infrastructure that can be reliably delivered in a corrupt developing state with poorly-enforced rule-of-law. Without reliable clean running water, electricity, and sewerage disposal, a washing machine makes no sense.

Eric August 27, 2012 at 2:43 am

Collecting land value tax (ground rent — a subset of economic rent) and distributing it in a citizens’ dividend would make China’s internal demand match up with its supply and free it of too much dependence on exports.

Since this was Sun Yat Sen’s political economic philosophy (from Henry George) and it was used in the highest growth stages of Hong Kong, it would be most interesting to locate the blocking force within China to this obvious path to economic progress and independence. I suspect it is not Chinese and would therefore require Chinese intelligence agencies to do the estimate. Of course, if the Chinese intelligence agencies are, themselves, compromised then that is probably a forlorn hope.

Roy August 27, 2012 at 6:13 am

If Chinese citizens paid land tax, they would feel entitled to the land. The Chinese government doesn’t want that because it would interfere with government (and party) control of the land. The property that is currently sold is not real property, it is a revocable license to use property.

Eric August 27, 2012 at 2:47 am

What would happen if we simply replaced all taxes and government functions with a monthly citizen’s dividend paid out evenly to all adults, financed by a use fee for property rights? To make assessment easy we could use only liquidation value of said property rights (ie: mark to market).

The so-called “libertarians” would scream bloody murder at this even though it privatizes everything.

The so-called “progressives” would scream bloody murder at this even though it redistributes wealth.

Bankers and rentiers wouldn’t scream, they’d just hire mercenaries to kill anyone who led such a movement.

So I guess it must be a good idea.

Morgan Warstler August 27, 2012 at 1:13 pm

Eric, at minimum Libertarians will support land tax as the FIRST MAIN tax, and it should be used for two things:

1. running title office to prove who owns the land.

2. to put the cost of defensive wars on those who’s land is being defended.

Firat Uenlue August 27, 2012 at 6:53 am

Just a few quick remarks.

How does he imagine the productivity increase happens? The Chinese government is makes huge inroads and investment in high-tech areas, so much so that the association of German manufactures (VMDA) published a report on it and laid out where danger lies for German companies that are involved in the seven strategic emerging industries China aims to tackle with the 12th five-year plan.
Yes I am aware that the e.g. solar companies are “too bright too fail”…

China is doing excellent on the education front for its level of GDP/capita, granted rural schools and the like are hardly the stuff Amy Chua’s children will be applying for anytime soon but international results prove them to be high-ranking. The quality of uni. graduates needs to be improved however but focus has been on increasing the number of graduates in the last decade.

All those servants in the stores? Yes there are too many of them but guess what, the past centuries some Chinese people preferred to use humans rather than donkeys because humans were even cheaper than donkeys (you have to feed the donkey every day). The Chinese have a saying, china lacks everything but humans…

Transportation need to be judged by segments so not commenting here (subway, high-speed rail etc). What has been built too quickly is definitely housing even if you solely judge it by quality of material used etc. There is a reason why you should build over time, you accumulate knowledge and can use it on newer building. By building so much in such a short time they have not had time to use their knowledge which led to shoddy construction at times.

The financial system is a mess but then it has always been used by the government for government purposes. If you invest in Chinese financials expecting them to be run like Western banks you are an idiot. A full-blown idiot.

To a huge degree this debate about China is about the ideas of Gershenkron and how countries can develop by focussing on investment.

The Wobbly Guy August 27, 2012 at 8:34 pm

Not that Western banks and financial institutions are much better… :p

Just kidding.

Andrew' August 27, 2012 at 7:53 am

Leaf blowers?

liberalarts August 27, 2012 at 8:12 am

There are plenty of wealthier countries that have people with the phony jobs, so Chinese productivity will have to rise a fair bit to get rid of those. Countries where someone demands you pay them in order to hail a taxi are my metric for those with low productivity labor. And there are a lot of those.

Sbard August 27, 2012 at 9:31 am

Japan doesn’t do that, but it still has plenty of phony jobs. At least half of the distribution companies in the country only buy from a single company and sell to a single company.

derek August 27, 2012 at 10:09 am

Them? Who is ‘them’ that are supposed to do all these wonderful things for the benefit of others?

Merijn Knibbe August 27, 2012 at 10:15 am

On china. What was special about our crisis of the thirties? What made Keynes reject classical economics? The answer: after about 1880 the investment rate increased from 5-7% of GDP to 20-30% of GDP. But investments are volatile – and (partly because they were financed by loans) the investment rate (gross) declined to 5-7% again, in the thirties. But lo and behold – thanks to the ‘learning curve’ and electricity and the light bulb and radio and all that PRODUCTIVITY CONTINUED TO INCREASE, even after the decline of the investment rate (and even though net investments in the USA and Germany became negative in some years…). As an increase of expenditure required either a massive increase of exports, which was out of the question, or an increase of government spending which required a complete redefinition of government which only a manic idiot could think of (well, such a manic idiot did exist, it turned out) or an increase of consumption which required a social an cultural revolution which in most countries only took place after WW II we remained in crisis until, well, until WW II forced us to redefine government. Fortunately, after the war some Galbraith-minded politicians did not stop the social revolution and the spread of the consumer society… Returning to China it strikes the mind that its investment rate is about 40%, or so, even higher than in The West in the twenties… The point: whenever Chinese investments decline, a social revolution or a redefinition of government has to take place which will offset (sorry, Tyler) the decline of aggregate expenditure caused by the decrease of the investment rate. And yes: markets can facilitate this, in a matter of four or five years…Let’s hope there are no manic idiots, overthere, but Galbraith minded economists who understand that hundreds of millions need comfortable, engergy-smart, durable, cozy homes in a green, pleasant environment where bycicles can be used to do your shoppings, inhabited by people who pay $ 20,– for a haircut.

dirk August 27, 2012 at 11:39 am

“I want them to start building leaf blowers, so we don’t have so many Chinese people in the low productivity position of sweeping streets.”

I want all the leaf blowers in the U.S. sent to China so I can sleep past goddamn 8 a.m. for once on a Saturday morning. It’s OK if we send them our Mexicans too. They know how to use them.

Dave August 27, 2012 at 11:40 am

I’m very curious, from the point of view of an economist with an eye on history, what exactly is a ‘make-work’ job? The tacit assumption in the article is that ‘make-work’ jobs should be identified and eliminated so that people and society can go on to more exalted things. But this would appear to be a slippery slope. Over the span of history, a great many types of jobs that were once assumed to be respectably productive (ie. dockworkers) have been eliminated. Currently, in manufacturing, we are in the middle of a quiet revolution in robotics where nearly all manufacturing tasks are candidates for elimination. God knows that most of the ‘managers’ I have worked for could have been eliminated without much pain to productivity. Where does this all end? What are the implications for society when most jobs that are intellectually doable by the masses have been eliminated?

Rich Berger August 27, 2012 at 11:54 am

I can understand why some blogs have stopped accepting comments.

DL August 27, 2012 at 3:27 pm

+1

Jameson Burt August 27, 2012 at 2:23 pm

Hmm. China should exit making subways — highways and railways too?
When every local baron creates his own road, we get taxes on every mile of poor road and every bridge, naming transportation like “Little River Turnpike” and “Harry’s Toll Bridge”. Doesn’t this limit movement and so economic activity?

What’s good for Hong Kong can be good for the rest of China.
In Hong Kong you will see a largely circular subway,
where each stop houses about 100,000 people in a few dozen 70 story buildings,
with the bottom three stories comprising stores and businesses.
A child seeking a tutor need merely go to another floor, rather than drive a few miles.
This is the height of efficiency.

Beijing has five concentric interstates with radial arms connecting them.
This too is the height of highway efficiency.
With 8 out of 9 top Chinese officials being engineers,
with China having at least a scintilla of success;
we should ask not how China should change,
but how we should change.

Bradley Gardner August 27, 2012 at 8:26 pm

That would all be great, if it weren’t for the fact that China is the largest producer of leaf blowers, washing machines, farm equipment, electric stoves, computers, etc. in the world. If China didn’t invest heavily in private education and public education, and have a growing surplus of educated labor.

Also it would make a lot more sense if China didn’t have a very real housing shortage in the lower-end of the price spectrum.

I often think that people forget that China added about a billion people to the global labor market in the past 30 years. We’re not exactly talking about a country with a shortage of labor capacity.

JasonL August 28, 2012 at 3:42 pm

I will subscribe to Yulu Wang’s newsletter. At some point, yes even for public spending, return on investment has to matter. A completely barren city or unused train that transitions through phase after phase of depreciation without meeting any demand is the definition of a failed expenditure. This is the Chinese version of reinflating the housing bubble here in the US.

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